Dubai Under Fire

July 2, 2014byRob Bates

In the past decade, the growth of Dubai as a diamond center has been phenomenal—more than $40 billion in diamonds are now traded in the most populated city in the United Arab Emirates, up from $5 billion less than a decade ago. The reasons are obvious: It offers traders a free-trade zone with no taxes on imports and exports, backed by a government that tries not to interfere with business. By contrast, rival Antwerp has had to cope with now-lifted sanctions on Marange diamonds, and faces a possible E.U. prohibition on Russian gems. Dubai has none of those concerns.

But in the last month, the desert city known for its 90-degree temperatures has faced a different kind of heat over just how laissez-faire its oversight is. Last month, Antwerp World Diamond Centre, the Belgian industry group, announced it had seized a parcel of diamonds from the Central African Republic—gems that are banned by the Kimberley Process. That parcel came from Dubai. And while the AWDC did not name its rival in its statement, it pointedly referenced CAR diamonds receiving “forged KP certificates that are insufficiently controlled via other diamond hubs.”

Peter Meeus, chairman of the Dubai Diamond Exchange (and former CEO of the AWDC), tells JCK that Dubai received the parcel from the Democratic Republic of Congo with a valid KP cert. He says local experts perform physical inspections on every parcel but this certificate did not raise questions. And while Antwerp authorities told him the shipment came from a trader known to deal in CAR goods and matched a “digital footprint” of goods from that country (and apparently contained the same volume of goods as previous legal CAR exports by that trader), he is not convinced of its provenance.

“It is not such a clear-cut case,” he says. “We showed the pictures to many people, and it could be Guinea, it could be South Africa, it could be many places.”

He notes his center does not have access to the same digital images that Belgium has, but Dubai is willing to take the lead on developing a digital database to identify problem goods.

Perhaps more serious are allegations in a recent report from NGO Partnership Africa Canada (PAC) that Dubai is a haven for what is called transfer pricing.

“We have noticed for some time that diamonds entering Dubai at one price exit at another price,” says report coauthor Alan Martin. In 2013, the difference was 42 percent, and in 2011 it was 74 percent. And while there are value differences in other centers, he argues that “in Dubai the difference is five times that of its nearest competitor [Switzerland].”

Martin admits that “part of that may be due to mixing parcels” but says that can’t explain the entire differential. He believes transfer pricing lets traders underpay for their diamonds in Africa, “and then honestly export those diamonds from Dubai at their true value. And their tax liability is zero.” This deprives African governments of needed tax revenue, he argues. PAC estimates that transfer pricing cost the Democratic Republic of Congo $66.2 million last year.

The report further adds that some of the differentials may also be a screen for money laundering, and says UAE’s policy of allowing cash transactions (in which it is not alone) could foster this as well.

Meeus responds that the Financial Action Task Force/Egmont Group report on money laundering and terrorist financing in the diamond business barely mentions Dubai and mostly focuses on other centers. (Read the full response Meeus gave the KP intersessional here.) That said, the report’s references to Dubai are hardly flattering. It says that free-trade zones are susceptible to money laundering and that the transfer-pricing issue requires more study.

About the cost discrepancy, Meeus says, “There is an issue with underpriced African goods. That everyone knows.” (Indeed these allegations go back at least nine years.)

Martin believes this is Dubai’s responsibility and it needs to do more investigating. “It looks very strange for Dubai,” he says. “They should come out and say, ‘This is happening for these reasons.’ ”

Lurking in the background of all this is Dubai’s desire to become chair of the Kimberley Process. If these issues are not cleared up, that bid “might not be the best from a KP perspective,” Martin says. (Indeed, Angola’s bid to become KP chair was blocked by NGOs in the past.)

Ever since it burst on the scene, there has been talk about how Dubai has grown so much and so fast. Dubai may feel singled out by the PAC report—Meeus walked out of the Precious Stones Multi-Stakeholder Working Group meeting in Paris when it was presented, Martin says—but at least it brings these issues out in the open. As everyone admits transfer pricing is a valid issue, it’s time to take a more serious look at it.

World Diamond Council president Edward Asscher told me recently that without a level playing field, “diamonds will go to their weakest point.” Dubai is an established part of the diamond community. It’s brought new energy to the industry and a much-needed gateway to the Middle Eastern retail market. It has also been a strong supporter of the Kimberley Process. But, particularly with the transfer pricing issue, some are now looking to it to show that it is not a weak link in the chain.